Final Order 1

Order Details: Notice of Motion
Pdf Text: :1: N.M. No.1772/2019 in Com. Suit No.10/2019
IN THE BOMBAY CITY CIVIL COURT AT MUMBAI
NOTICE OF MOTION NO. 1772 OF 2019
CNR NO.: MHCC010048542019
IN
COMMERCIAL SUIT NO. 10 OF 2019
TATA CAPITAL LIMITED and others )...Plaintiffs
Versus
M.C. KARTHIKEYAN IYER and others )...Defendants
Appearances:
Advocate Mr. Gandhi for the plaintiffs.
Advocate Mr. Kirit Modi for defendant No.1.
Advocate Mr. Kapadia for defendant Nos. 4 to 23.
CORAM : HER HONOUR JUDGE
SONALI P. AGARWAL
(C.R.NO.14)
DATED : 11th DECEMBER, 2019.
ORAL ORDER
This is a Notice of Motion filed by plaintiffs to restrain defendants
from selling, transferring, alienating and creating any right or interest in
23,433 shares of plaintiff No.1.
Allegations of plaintiffs in nutshell are as under:
2. In 2010, “Tata Capital Limited Employee Stock Purchase / Option
Scheme” (hereinafter referred to as “the Scheme 2010” for the sake of
-- 1 of 15 --
:2: N.M. No.1772/2019 in Com. Suit No.10/2019
brevity) was implemented by plaintiff No.1 and by such Scheme 2010
eligible employees had the option to purchase shares of plaintiff No.1
during particular period. As per clause 19 of the Scheme, the shares
acquired by eligible employees were not allowed to be transferred to
anyone save and except as stated under Clause 15.5 of the Scheme. The
Scheme contemplated that upon the shares of plaintiff No.1 Company
on getting listed, an eligible employee will have the right to sell the
shares to any person, subject to the provisions relating to lockin and
the retention period specified therein. It was further stated in Clause
18.1.1 of the 2010 Scheme that upon resignation of the eligible
employees, if option had been exercised, the eligible employees could
be required to sell and transfer the shares to plaintiff No.2 at a price
lower of the fair market value determined prior to date of resignation or
the exercise price.
3. Plaintiff has further stated that defendant No.1 exercised option
to purchase shares as employee and got 23,433 shares. Plaintiff has
further stated that the Scheme was amended in 2013 and as per Clause
15.6 of the amended Scheme, the eligible employee had the option to
sell the shares acquired by him on the terms and conditions determined
by the ESOP Committee.
4. Plaintiff has further stated that on 5th August, 2013, the retention
period as defined under the Scheme with respect to the 23,433 shares
held by defendant No.1 expired, upon which defendant No.1
transferred his shares out of his demat account with Tata Securities
Ltd., to his demat account with another Depository Participant. By letter
dated 14th August, 2013, defendant No.1 was informed that any transfer
of shares is governed by the Scheme as amended from time to time, and
-- 2 of 15 --
:3: N.M. No.1772/2019 in Com. Suit No.10/2019
that defendant No.1 can only transfer the shares to the plaintiff Trust.
By such letter, defendant No.1 was called upon to execute and return
an undertaking to plaintiff.
5. Defendant No.1 by his letter dated 20th August, 2013, assured
plaintiff that he will not transfer any of the shares to the plaintiff No.1
to any person under any circumstances. Alongwith this letter, defendant
No.1 also forwarded an undertaking to the effect that he will not
transfer the Suit shares to any third party until the listing of the shares
of plaintiff No.1 except to the plaintiff Trust in accordance with the
terms of the Scheme. It was understood by defendant No.1 that the Suit
shares acquired by him are not transferable to any third party except
upon listing of plaintiff No.1. On defendant leaving the plaintiff's
Company, he was told that his decision to leave the employment would
be treated as a resignation case and not voluntary retirement and
defendant No.1 was relieved from employment on 11th December, 2017.
It was asserted to defendant No.1 that Suit shares held by him shall be
treated as per the applicable proposals and exit options under the
Scheme.
6. In the year 2019, defendant No.1 by email informed plaintiff that
he has sold Suit shares (except 33 shares) to defendant Nos. 4 and 22.
7. Subsequently, the plaintiffs learnt that the Suit Shares held by
defendant Nos. 4 and 22 have further been transferred to defendant
Nos. 5 to 21 and 23. Defendant No.1 had transferred 10,000 shares out
of the Suit Shares to defendant No.22, which were subsequently
transferred. Plaintiff has further stated that one of the purported
transferees of the Suit shares i.e. defendant No.23, further transferred
-- 3 of 15 --
:4: N.M. No.1772/2019 in Com. Suit No.10/2019
1000 shares held by him to defendant Nos.18, 20 and 21. Plaintiff has
further stated that he apprehend that defendant Nos. 4 to 23 will
continue to transfer the Suit shares or part thereof to various
individuals, and same would cause grave harm and irreparable damage
to the plaintiffs.
8. Plaintiff has further stated that defendant Nos. 1 and 4 to 23 have
deliberately obstructed the grant of reliefs as sought for by the plaintiffs
by making further transfers of the Suit shares and prayed for injunction.
9. Defendant No.1 filed reply and contended that he was holding
free shares of plaintiff No.1. He has further contended that the shares
became free after serving retention period of 3 years to implementation
of Employees Stock Purchase Option Scheme 2010. Defendant No.1 has
contended that suit filed by the plaintiffs is untenable as the free shares
cannot have conditional strengths to restrict the transferability when
SEBI Regulation 2018 governing defendant Nos. 2 and 3 provides
options such as Pledge, Lockin and Lien. He has further stated that
defendant Nos. 2 and 3 would not have executed the transfer of shares,
had the shares been in lockin or pledged earlier. He has further
contended that the transfer was approved by defendant Nos. 2 and 3
which validates the fact that free shares have full transferability without
restrictions.
10. Defendant No.1 has further contended that initial retention
period was for 3 years which expired in April, 2013 and plaintiffs
framed rules to the detriment of the shareholders so as to prevent them
from selling the shares even after the retention period by deliberately
not listing the shares till date. He has further stated that there cannot be
-- 4 of 15 --
:5: N.M. No.1772/2019 in Com. Suit No.10/2019
a one sided contract, which is perpetual and at the whims and fancies of
the plaintiff No.1. He has further stated that the changes made in the
Scheme 2010 unilaterally through the Scheme 2013 were detrimental
to the interest of the employees.
11. Defendant No.1 has stated that he wrote an email to plaintiff's
employee Mr. Amar Sinhji who was part of senior management of
plaintiff No.1 raising objections as. But after having waited for more
than 3 months for a suitable response to his email dated 22.04.2013, he
initiated to move the free shares from his Demat account with plaintiff
to HDFC Bank.
12. He has further stated that as per Scheme 2013, any allottee of the
shares was supposed to return the shares back to plaintiff No.1's ESOP
Trust at the time of resigning from the employment of plaintiff No.1
irrespective of retention period.
13. Defendant No.1 has stated that he was compelled to give an
undertaking that until the listing of the shares of plaintiff No.1, he will
not transfer the suit shares to any third party save and except to the
Trust in accordance with the terms of the Scheme. He has further stated
that the undertaking taken by the plaintiff No.1 was illegal as he was
not even given proper explanation for his complaints on the change in
the 2010 Scheme.
14. Defendant No.1 has further stated that as per Scheme 2013, he
was supposed to give 2526 shares back to the plaintiff No.1's ESOP
Trust, which he complied with at time of separation from the
employment of plaintiff No.1 in November, 2017.
-- 5 of 15 --
:6: N.M. No.1772/2019 in Com. Suit No.10/2019
15. Defendant No.1 has stated that by email dated 03.03.2018, he
asked for dividend for the equity shareholders as there had been no
return to the shareholders in terms of dividends for the past 10 years.
But the Directors of the plaintiff No.1 did not declare the dividend for
the year 20172018 and instead, there was an agenda in the AGM to
raise equity capital from Tata Sons. Defendant No.1 has further stated
that the Directors never acknowledged nor reverted to the real concerns
affecting the shareholders. He has further stated that for having waited
for 8 years and 6 months as a shareholder, he decided to encash by
selling the free shares in the open market.
16. Defendant No.1 has further stated that though the suit shares
were allotted to him in August, 2010, no dividend was declared by
plaintiff No.1. He has further stated that the Scheme was amended in
the year 2013 to prevent the shareholders from indefinitely transferring
or dealing with the shares. He has further stated that the transfer of suit
shares by him is not illegal or void and prayed for rejection of the
Notice of Motion.
17. Defendant Nos. 4 and 22 have filed reply and stated that
Securities and Exchange Board of India (Depositories and Participants)
Regulations, 2018 governing defendant Nos. 2 and 3 provide options
such as pledge, lockin and lien. They have further contended that
defendant Nos. 2 and 3 would not have executed the transfer of shares
between defendant Nos.1 and 4 to 23, had the shares been in lockin or
pledge or lien and therefore, transfer approved by defendant Nos. 2 and
3 validates the fact that the free shares are having no transferability.
They have further stated that owing to the free transferability of shares
of public limited companies being listed or unlisted, as directed by the
-- 6 of 15 --
:7: N.M. No.1772/2019 in Com. Suit No.10/2019
Companies Act 1965 and supported by the discloser by the depositories,
they entered into the contract of buying shares from defendant No.1, as
the shares had become free shares. They have further contended that
once free hold shares are transferred in their name as per records of
defendant Nos. 2 and 3 then correspondences with plaintiff was done
only to make a note in their records too. They have denied that
irreparable loss may be caused to plaintiff, if injunction is not granted
and prayed for rejection of the motion.
18. Defendant Nos. 5 to 21 and 23 have also filed similar reply as
that of defendant Nos. 4 and 22.
19. Heard argument of Ld. Counsels for the plaintiffs and the
defendants. Perused Notice of Motion, affidavit in support of Notice of
Motion and reply filed by Defendants.
20. To decide this Notice of Motion, following points arises for my
determination and their answers followed by reasons are as stated
below:
Sr. No. POINTS FINDINGS
1. Does the plaintiffs made out prima
facie case for order of temporary
injunction against defendant Nos.1
and 4 to 23 ?
...In the affirmative
2. Does the plaintiffs made out case that
balance of convenience lies in their
favour?
…In the affirmative.
3. Does the plaintiffs shows that, if ...In the affirmative.
-- 7 of 15 --
:8: N.M. No.1772/2019 in Com. Suit No.10/2019
order of temporary injunction not
granted in favour of plaintiffs, they
will suffer irreparable loss ?
4. What order ? ...As per the final order.
REASONS
AS TO POINT NOS. 1 TO 4 :
21. It is admitted fact that defendant No.1 was employee of plaintiff
and when he was an employee he purchased 23,433 shares of plaintiff
under Employees Stock Purchase Option Scheme 2010 (ESOP). It is also
admitted fact that after defendant No.1 resigned from plaintiff's
Company and he has sold such shares to other defendant and other
defendant to further other defendants.
22. It is also not in dispute that 23,433 shares were acquired by
defendant No.1 as per the ESOP Scheme 2010. It appears, it is a specific
condition No.10 that:
Nontransferability of Option
“The Option granted to the Eligible Employee shall not be transferable”.
23. It appears there was specific condition No.15.5 of the Scheme
2010 that, “Upon the shares of the Company being listed, the Eligible
Employee shall have the right to sell the Shares to any person, subject to
the provisions relating to lockin and the Retention Period specified herein.
It is not in dispute that the shares are sold by defendant after retention
period is over. But it is pertinent to see that the shares are sold by
defendant No.1 though the shares of the plaintiff Company were not
listed. It appears, as per the Scheme 2010, it was one of the important
-- 8 of 15 --
:9: N.M. No.1772/2019 in Com. Suit No.10/2019
condition that, the employee can sell only shares of the Company being
listed, subject to the provisions relating to lockin and the retention
period specified herein. Hence, it appears as per the Scheme 2010
employee had no right to sell the shares of the plaintiff Company till the
time they are not listed.
24. Defendant No.1 has contended that amendment of the Scheme in
2010 was detrimental to the interest of the employee of the Company.
Plaintiff has contended that the Scheme was amended so that employee
can sell their shares. As per the Scheme 2010, Clause 18.1:
Due to resignation or transfer of the Employee
“In case of resignation by an Eligible Employee from the employment or
directorship of the Company, the Subsidiary or the Hold Co (as the case
may be), prior to the expiry of the Retention Period as contemplated
hereunder otherwise than upon retirement or transfer to another Tata
company or Tata enterprise, the Options vested in such Eligible Employee,
but not exercised by such Eligible Employee, shall expire forthwith on the
acceptance of the resignation of such Eligible Employee. However, in case
of the Options vested which have already been exercised by an Eligible
Employee, the ESOP Committee may require the Eligible Employee to sell
and transfer the Shares to the Employee Trust at the lower of the Fair
Market Value as determined by the last valuation prior to such date of
resignation or the Exercise Price for such Shares. The decision of the ESOP
Committee in this regard shall be final and binding on the concerned
Eligible Employee”.
25. It appears, as per Clause 18.1 of the Scheme 2010, employee may
be required to sell and transfer the Shares to the Trust at the lower of
-- 9 of 15 --
:10: N.M. No.1772/2019 in Com. Suit No.10/2019
the Fair Market Value as determined by the last valuation prior to such
date of resignation or the Exercise Price for such Shares. It is further
stated that, the decision of the ESOP Committee in this regard shall be
final and binding on the concerned Eligible Employee”. So as per 2010
Scheme, defendant No.1 had right to sell shares to Employee Trust only
and not to third party.
26. As per the amended Scheme 2013, there was amended Clause
No.15.6 added which runs as under:
“Notwithstanding anything contained in this Scheme, until the Shares of
the Company are listed, the Eligible Employee shall be obligated to sell the
Eligible Employee's Shares to the Trustees, acting on behalf of the Trust, on
such terms and conditions as may be determined by the ESOP Committee
and/or the Trustees, at their sole discretion including the purchase price,
the number of tranches in which such Shares may be purchased by the
Trustees from the Eligible Employees and the number of such Shares that
may be purchased in each tranche by the Trustees and the specified time
period/window within which such Shares may be purchased by the
Trustees. The decision of the ESOP Committee and/ or the Trustees in this
regard shall be final and binding on the concerned Eligible Employee”.
Therefore, prima facie it appears that, the Scheme in the 2013 gave
option to employee to sell their shares even before listing but subject to
condition that, they have to sell it to the Trust, at a price as may be
determined by the ESOP Committee not exceeding the Fair Market
Value. Therefore, prima faciely it appears such amended Scheme 2013
is not against law.
27. Defendant No.1 has admitted that while transferring his shares
-- 10 of 15 --
:11: N.M. No.1772/2019 in Com. Suit No.10/2019
held in the demat account and transferring it to his other demat account
with HDFC Bank he gave undertaking but contended that such
undertaking taken by plaintiff No.1 is illegal and untenable. It appears
that he has given undertaking that, “accordingly, I undertake that, until
listing of Equity Shares of Tata Capital Limited (including resultant
company by way of merger, demerger, amalgamation or any scheme of
arrangement), I shall not transfer any Equity Shares granted to me
(including legal heir or nominee in case of my death) under the Scheme, to
any person other than the TCL Employee Welfare Trust, in accordance
with the provisions of the Scheme”.
28. It appears in the undertaking also defendant No.1 has clearly
undertaken that until listing Shares of plaintiff, he will not transfer
shares to any person other then the plaintiff's Employee Welfare Trust.
It appears, undertaken is given in consonance with the Scheme of 2010
and 2013.
29. It appears, after giving such undertaking in the year 2013, there
is nothing to show that defendant No.1 took any action against
plaintiff's Trust by making any application to any Forum that such
undertaken is taken forcefully from him. Such undertaking clearly
shows that defendant No.1 was very much aware that he has
undertaken not to transfer shares to anyone other than plaintiff's
Employee Welfare Trust. It appears that though this undertaken is given
still defendant No.1 transfer shares to the people who are admittedly
not employee of plaintiff nor plaintiff's Employee Welfare Trust.
30. At this interim stage, plaintiff has prima faciely shows that the
-- 11 of 15 --
:12: N.M. No.1772/2019 in Com. Suit No.10/2019
Scheme of the year 2010 and 2013 had the condition that their
employees can sale their shares to the plaintiff's Employee Welfare Trust
only, till the shares are listed. It appears that the Scheme is not a
compulsory but was optional. There is nothing to show that it was the
compulsory scheme that the employee must sign it. Hence, it appears
that defendant No.1 exercised option to buy shares under ESOP Scheme
freely which shows that he accepted the condition that the shares
cannot be sold until they are listed and the condition that the shares can
be sold on resignation only to plaintiff's Employee Welfare Trust and
not anyone till they are listed. When plaintiff has exercised such option
of buying shares under such Scheme it appears it was a contract
executed between plaintiff and defendant regarding sell of shares.
Prima faciely, such scheme being a voluntary contract appears to be
legal and not illegal. Hence, plaintiff has prima faciely shows that
defendant No.1 had right to sell shares to only Employee Trust and had
no right to sell shares to other defendants till shares of plaintiff
Company are listed and such condition being a contract between
plaintiff and defendant not illegal.
31. Advocate for the plaintiff cited judgment of the Hon'ble High
Court in case of Bajaj Auto Ltd., v. Western Maharashtra
Development Corporation Ltd., 2015 SCC OnLine Bom 2111 :
(2015) 4 Bom CR 499, in which it is held that, “we have come to this
conclusion because we find that shares of a company are movable property
and the right of the shareholder to deal with his shares and/or to enter
into contracts in relation thereto (either by way of sale, pledge, pre
emption etc.), is nothing but a shareholder exercising his property rights.
Such contracts voluntarily entered into by a shareholder for his own
-- 12 of 15 --
:13: N.M. No.1772/2019 in Com. Suit No.10/2019
shares giving rights of preemption to a third party/another shareholder,
cannot constitute a restriction on free transferability as contemplated
under section 22A. In fact, such contracts (either by way of sale, pledge or
preemption) are entered into by a shareholder in exercise of his right to
freely deal with and/or transfer his own shares.” In the case in hand also,
defendant No.1 has entered into a contract in relation with shares by
Scheme 2010 with the plaintiff No.1 Company that he will not sale such
shares to any person other than plaintiff's Trust till the Company is
listed. Therefore, this case law is squarely applicable to the case in
hand.
32. Defendant Nos. 4 and 22 have contended that shares of Public
Limited Company are freely transferable. Defendant Nos. 4 and 22 have
contended that there can be no restrictions no transferability of free
shares. In the case in hand, it is admitted facts that plaintiff is the Public
Company and not listed. The shares sold by defendant No.1 were taken
by him under a special contract called plaintiff ESOP Scheme 2010.
Defendant No.1 has already undertaken and executed contract with
plaintiff No.1 that he will not sell shares to anyone other than plaintiff's
Trust till the Company is listed. It being a voluntary contract, it cannot
be called an illegal restriction on transfer as of shares. Therefore, such
contention at this prima facie stage is rejected.
33. Defendant Nos. 4 and 22 have contended that they are bonafide
purchasers of the shares having no notice of such confidential contract
between plaintiff and defendant No.1. But a person cannot transfer a
better title than what he is having. It is a matter of evidence as to
whether defendant had knowledge about the special contract i.e. ESOP
-- 13 of 15 --
:14: N.M. No.1772/2019 in Com. Suit No.10/2019
Scheme 2010 between plaintiff and defendant No.1. Defendant Nos.1
and 4 to 23 were also knowing that plaintiff is not a listed Company.
Hence, it appears at this stage there are various issues as to whether the
contract i.e. Scheme 2010 executed between plaintiff and defendant
No.1 having condition that defendant No.1 can sell shares only to
plaintiff Trust is valid or not and whether defendants are bonafide
purchasers having no notice of the same, which needs to be tried. In
order to avoid multiplicity of proceedings and to keep the shares intact,
it will be proper to restrain defendants from alienating the shares
further to anyone. Definitely shares are not immovable property for
which any receiver is required to be appointed. Ld. Counsel for the
plaintiff stated that defendants have already disclosed as to whom they
sold shares, therefore, there is no need to pass any interim order to that
effect.
34. As discussed above, plaintiff has made out prima facie case that
defendant No.1 had right to sell shares to only Employee Trust and had
no right to sell shares to third party till they are listed on exchange.
Definitely, if shares are sold to third parties, it will cause irreparable
loss to plaintiffs and balance of convenience lies in favour of plaintiffs.
Hence, answer point Nos. 1 to 3 in the affirmative and pass following
order:
ORDER
1. Notice of Motion No.1772 of 2019 is allowed in terms of prayer
clauses (a) and (d).
2. Defendant Nos.1 and 4 to 23 are hereby restrained through
themselves and through their representatives, agents, servants or
through any one from selling, transferring, alienating, creating
any right or interest and in any manner dealing with the 23,433
-- 14 of 15 --
:15: N.M. No.1772/2019 in Com. Suit No.10/2019
shares of plaintiff No.1, i.e. the Suit shares in favour of any other
parties till disposal of suit.
3. Defendant Nos. 2 and 3 are hereby restrained from recognising or
giving effect to any sale/transfer of the 23,433 Shares, i.e., the
Suit Shares, by defendant No.1 and defendant Nos. 4 to 23 in
favour of any persons, parties or entities till disposal of Suit.
4. Notice of Motion No.1772 of 2019 stands disposed of.
(SONALI P. AGARWAL)
Judge,
Date: 11.12.2019. City Civil Court,
Gr. Bombay.
Dictated on : 11.12.2019
Transcribed on : 11.12.2019
Signed on : 11.12.2019
CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL
SIGNED JUDGMENT/ORDER.”
18.12.2019 At 11.35 a.m. Mr. Subhash Sukhdeo Poul
UPLOAD DATE AND TIME NAME OF STENOGRAPHER
Name of the Judge (With Court
Room No.)
HHJ Sonali P. Agarwal
(C.R.NO.14)
Date of pronouncement of
Judgment/Order
11.12.2019
Judgment/Order signed by P.O. on 11.12.2019
Judgment/Order uploaded on 18.12.2019
-- 15 of 15 --